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Hello
I need help and any advice I can get on the following. I'm in a state
of shock!!!
Use of Synthetic bars (timeframe compression) in back testing and its
validity
Just to make sure what I mean by synthetic bars. I have written a
routine that will compress the daily bars to any number of bars –
example for weekly; I can compress it by 5 bars and for monthly 22
bars. The compression is done from right to left which is different
from normal weekly and monthly compression, which is done on calendar
day end of a week or month. Synthetic bar compression is dynamic and
each day (new bar) on the right edge is used for re-computing.
Example if today is Monday than the weekly (5 bar) compression will
start from previous Tuesday and if today is Tuesday than the weekly
start will be previous Wednesday…. and so on. You know what I mean.
Questions I have is that,
Is this a valid method of compression for dynamic time frame?
Creating EMA of this compressed bar will provides dynamic weekly EMA,
which can be used in a daily chart. Though there is a slight
difference between true weekly EMA and this, is it a valid method for
analysis? I have also noticed that this method has lesser lag and it
is more responsive.
Does this method of compression violate the rule that we should not
look ahead for back testing?
Will the dynamic nature of the compression invalidate back test
result for historical data?
The reason I'm asking these questions is that when I back tested this
with a simple trading rule for entry and exit using a 22-day
compression with 3 period EMA (this simulates 66 day EMA), I was
getting results that I couldn't believe my eyes!!! I have tested with
400 counters over an average of 10 years of data and 395 came out
with 0 losing trades and the remaining 5 with 2 to 3 losing trades.
Though the drawdown was sometimes high, the overall profits and
winning trades are just out of this world.
Since this to me seems too good to be true, I would appreciate your
expert opinion and guidance.
Thanks in advance
Regards
Siva
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